Director liability

Director liability matters to anyone who will become a director of a company they buy. Some company debts can be pursued against the people who were directors when the debt arose, not only against the company. The share purchase answer covers the deal side; this entry names the rules.

The federal rules

Under section 119 of the Canada Business Corporations Act, directors are jointly and severally liable to employees for wage debts, up to a cap, for services performed while they are directors, subject to the conditions in that section. Section 227.1 of the Income Tax Act makes the directors at the time the corporation was required to deduct, withhold, remit or pay certain amounts jointly and severally liable, together with the corporation, for the failure; section 323 of the Excise Tax Act does the same for a failure to remit net tax. Each applies only in the circumstances it lists, such as an unsatisfied execution on a registered certificate, or the company’s liquidation, dissolution or bankruptcy. Both contain a defence: the director exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. Section 227.1 of the Income Tax Act bars an action, and section 323 of the Excise Tax Act bars an assessment, more than two years after the director last ceased to be a director.

Provinces differ

Ontario’s Business Corporations Act, section 131, has its own wage rule that also reaches vacation pay accrued while a person is a director. Other provinces run their own statutes, so confirm the Act the company is governed by.

What to check or ask

• Whether payroll and GST/HST remittances are current, using the company’s CRA account records
• Whether any default pre-dates your appointment
• Which record shows the care taken to prevent failures